Fiscal Deficit Within 3% of GDP... Pre-Feasibility Study Threshold Raised from 50 Billion to 100 Billion

Promoting Legislation of Fiscal Rules Within the Year to Reflect in the 2024 Budget Proposal
Managing National Debt Ratio at the 50% Level
Strengthening Adjusted Preliminary Feasibility Study and Exemption Conditions

[Asia Economy Sejong=Reporter Kwon Haeyoung, Sejong=Reporter Son Seonhee] The government plans to manage the fiscal deficit ratio relative to Gross Domestic Product (GDP) within 3% and keep the national debt ratio in the mid-50% range by 2027. Based on the National Finance Act, it will strengthen binding force, push for the law's passage this year, and apply it immediately from the 2024 budget drafted next year. Additionally, the preliminary feasibility study (PFS) system for new projects involving large-scale fiscal spending will be significantly revised for the first time in 23 years by doubling the project cost threshold for conducting PFS (from 50 billion KRW to 100 billion KRW) while tightening exemption criteria.

On the 13th, the government held an emergency economic ministers' meeting at the Government Seoul Office, chaired by Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho, where it announced the 'Fiscal Rules Introduction Plan' and 'PFS System Reform Plan' with these details.

First, a new fiscal rule will be introduced to manage the fiscal deficit within 3% of GDP, returning to the pre-COVID-19 level, and if debt exceeds 60%, the deficit ratio will be capped at 2%. Notably, the government will use the management fiscal balance (which excludes social security fund balances from the integrated fiscal balance) ? a stricter indicator than the integrated fiscal balance (government total revenue minus total expenditure). Using the management fiscal balance, the fiscal deficit ratio relative to GDP was 5.1% based on the 2022 second supplementary budget, higher than the 3.3% when using the integrated fiscal balance.

This aims to slow the increase in national debt and manage the national debt ratio relative to GDP from the current 50% to the mid-50% range during the current administration’s term. The national debt ratio rose by about 6 percentage points during 2008?2013 (Lee Myung-bak administration), about 3 percentage points during 2013?2017 (Park Geun-hye administration), but surged by a whopping 14.1 percentage points during the Moon Jae-in administration (2017?2022).

In times of crisis such as war, disaster, or economic recession, the fiscal rules will not be applied. This is the same condition as supplementary budget formation, but concerns have been raised that exceptions to the fiscal rules may occur frequently since past governments have formed supplementary budgets for eight consecutive years since 2015 without strictly interpreting the conditions.

Furthermore, the government decided to raise the PFS target criteria to 'total project cost of 100 billion KRW + 50 billion KRW in national funds.' For projects costing between 50 billion and 100 billion KRW, each relevant ministry will conduct its own feasibility verification. Also, for projects recognized as urgent, a ‘rapid PFS procedure’ will be introduced, shortening the selection period from 2 months to 1 month and the investigation period from 9 months to 6 months. This effectively reduces the total project initiation period by 4 months.

However, exemption conditions for PFS will be more specifically defined and applied as strictly as possible. This is because in the past, despite massive fiscal spending influenced by political preferences, 'blanket' PFS exemptions were often applied. Especially for welfare projects that are difficult to stop once funded, a pilot project system will be operated to conduct performance evaluations before deciding whether to initiate PFS for the main project.

Deputy Prime Minister Choo said, "While ensuring that the PFS system faithfully performs its role as the 'gatekeeper of finance,' we will also enhance the speed, flexibility, and transparency of PFS. We will closely consult with the National Assembly to introduce and legislate fiscal rules that control and manage the total fiscal volume."

This content was produced with the assistance of AI translation services.